Consumers’ Real Problem With Credit Scores

By AnnaMaria Andriotis

Consumers who check their credit scores don’t always see the same number that lenders see when they apply for a loan, a new report shows.

One out of five consumers who purchase their credit score will likely receive a “meaningfully different score” than a lender, according to a study released today by the Consumer Financial Protection Bureau. As a result, the CFPB says, they’re likely to end up with loan terms that are different from what they expected to get or they could waste time applying for a loan that they’re not qualified for. “This underscores what we’ve been talking about for years—there’s really no guarantee that the scores you can buy will be the same type of score the lender is looking at or that it’s even commercially available to the lender,” says John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring site.

As we’ve reported previously, consumers can order their credit scores from more than 20 web sites, up from around five a few years ago, at a cost of up to $20 a pop. The problem is that consumers often think that there’s one uniform credit score, when there are actually several types of scores for sale. They include the VantageScore that was created by the three main credit bureaus Equifax, Experian and TransUnion and separate scores created by those bureaus individually.

While the most commonly used score remains FICO—it’s used in 90% of lending decisions, according to financial services research firm CEB TowerGroup—49 different versions of this score are available to lenders, says Ulzheimer. The various scores assign more weight to certain characteristics, such as a borrower’s credit card activity or history with car loans or mortgages.

Whichever score the lender consults will ultimately determine whether the consumer gets approved for the loan, how much of a credit line he or she receives and at what interest rate. Consumers generally don’t know what score lenders have used to come to their decision — unless they’re rejected for a loan or given a rate that’s higher than what the lender advertises. A rule from the Dodd-Frank financial overhaul kicked in last year that requires lenders in such situations to automatically present borrowers with the score they used.

Some consumers are impacted more by credit score variations than others. The CFPB’s study found more variation among older consumers and among consumers who live in higher-income ZIP codes. Experts say these individuals have more access to credit than younger or lower-income applicants, making their credit information lengthier and possibly more prone to variations.

Beyond the difference of a few points, variations could lead to a borrower being in a different credit quality category than he or she otherwise believed based on the credit score they consulted. Different scoring models can lead to consumers being off by one category 19% to 24% of the time, according to the CFPB.